Data: Case-Schiller S&P CoreLogic; Chart: Axios Visuals
In the face of rising house prices, some Federal Reserve officials persuaded the central bank to abandon the mortgage-backed market.
Why is it important: Fed buys $ 40 billion Mortgage Backed Securities (MBS) every month to maintain stable interest rates and high liquidity in bond markets.
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The big picture (depending on who you ask): Stopping MBS purchases could disrupt the housing market, causing prices to fall, or the discontinuation of MBS purchases will not have a significant impact on prices because they were not originally targeted at this market.
What they say: Eric Rosengren of Boston Fed FT warned that housing boom-and-bust cycles threaten the rest of the economy by repeating it earlier statements that the mortgage market didn’t need the Fed.
Allianz chief economic advisor Mohamed El-Erian is more outspoken, telling Axios: “It is very difficult to argue with any reason that this hot housing market needs continued support in the form of the Fed’s monthly mortgage-backed purchases.”
“The benefits of continuing to buy from the Fed are more than offset by the costs and risks, whether it be for the functioning of the housing market or for the financial stability and well-being of the economy as a whole.”
Between the lines: While some argue the Fed risks future instability, a longtime Fed watcher Matthew K. Klein claims that it is because of these purchases that there is no more financial instability today.
“The Fed’s purchase of mortgage bonds is not aimed at the housing market, but at interest rate volatility in general,” Klein told Axios. “The Fed is effectively absorbing interest rate volatility on its own balance sheet.”
Intrigue: Tim Dye, economist at SGH Macro Advisors, argues that if MBS purchases are not specifically for home use, then stopping those purchases should not disproportionately affect home prices. Thus, an attempt to eliminate the “bad optics” of high house prices may fail because prices may not fall.
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